Japanese search for formula to avert trade war: Tokyo bureaucrats appear to have underestimated US frustration over persistently closed markets

JAPAN and the United States are on the brink of an all-out trade war, and, unlike the days of the Cold War, when the

US-Japan security alliance often overrode economics, Washington this time is showing no signs of backing down.

Japanese bureaucrats who have been advising Morihiro Hosokawa, the Prime Minister, apparently underestimated US frustration, leading to the failure of the US-Japan summit last week, the announcement of possible sanctions over mobile phones, and an unexpectedly sharp reaction in the currency markets.

'We are waiting for Japan to take the initiative to open its markets,' said the US ambassador to Tokyo, Walter Mondale, yesterday. 'We have said, and we mean it, that the status quo is unacceptable.'

Japan had a trade surplus of dollars 141bn ( pounds 95bn) with the rest of the world last year, and the surplus with the US amounted to dollars 59.3bn: both figures are the highest on record. 'We cannot sustain these trade and current-account imbalances, and the rest of the world cannot . . . We are waiting for the government of Japan to take steps to change it.'

The uncompromising stance taken by Mr Mondale, vice- president under Jimmy Carter and a respected diplomat in Tokyo, was another blow to Mr Hosokawa's government, which has said it is committed to deregulating Japan's markets and opening up to more imports, only to find itself blocked at every turn by conservative bureaucrats.

President Bill Clinton fingered these bureaucrats, particularly from the Ministry of Finance and the Ministry of International Trade and Industry (Miti), during a radio interview on Thursday night, saying they were opposed to change, because 'they think the system they have had worked . . . but there are a lot of other people who want Japan to become a fully modern state with fair and open trade'.

But Mr Hosokawa's hands are tied: he needs the bureaucrats to respond to the detailed US case alleging trade barriers in the mobile-phone, insurance, health-equipment and car-part industries. On Thursday he called a meeting of officials to map out new deregulation measures, but the results sounded hollow and vague.

Under the programme, the government would accelerate deregulation, promote imports, change the government procurement process and improve competition policy - promises that have been made numerous times in the past. 'There will be nothing really new included in the package,' a Miti official was quoted as saying. 'Even if we come up with something new, Washington will just take advantage of it.' It is precisely because these declarations of goodwill have so often proved to be empty that the Clinton administration is now demanding concrete indicators to measure market access.

The Japanese government says such indicators could lead to managed trade. But it has been unable to come up with fresh ideas for resolving the trade imbalance. And although the initial reaction to the failed Washington summit was one of pride that Japan had finally said 'no' to the US, opinions have shifted remarkably in Tokyo in the past few days. 'Don't become a Japan that just says 'no' ', commented the influential financial daily Nikkei yesterday.

The business community has been particularly worried by the sudden appreciation of the yen, which has gained 4 per cent against the dollar in the last week, squeezing exporters. Mr Mondale yesterday denied that the US was manipulating the value of the yen: 'We are not dealing with currency at all. The market does that.'

It is a sign of the changing times that if a trade war does break out between Japan and the US, President Clinton may find his forces will include a substantial part of the Japanese public. Since the recession has begun to bite in Japan, consumers are beginning to see the logic in buying cheap imported goods. The emotive power of small, impoverished but hard-working Japan standing up to bloated, lazy Uncle Sam does not have the effect it used to on an increasingly cosmopolitan and affluent public.